I. Nahorniak, K. Leonova, V. Skorokhod: Cryptocurrency in the context of development of digital single market...

Review Article
UDC 347.73:004.946:336.74(4-67EU:100)
004.056.55:004.421.5:004.72

CRYPTOCURRENCY IN THE CONTEXT OF

DEVELOPMENT OF DIGITAL SINGLE MARKET IN
EUROPEAN UNION *

Iryna Nahorniak **
Kristina Leonova ***
Vladyslava Skorokhod ****

ABSTRACT

The 21st century – is the century of technologies, destroying of economic barriers,

unification and globalization. Nowadays, post-industrial society, where market forces
have become quite complex the traditional economic transactional mechanisms in-
cluding newly introduced credit cards, debit cards, ATM and other electronic systems
are insufficient to cope with the new economic pressures and demands of the soci-
ety. Europe requires free movement of people, data, goods, funds. Paper is devoted
to implementing cryptocurrency in the context of development of digital single market
in EU. Aim of the paper is to investigate cryptocurrency, namely, bitcoin, define its
notion, explain its operation, examine its legal basis in the world and in EU and offer
future steps for achieving the main goals of the Digital Single Market Strategy. Paper
concludes, that the lack of legal foundation of bitcoin exists and proves the necessity
of adopting an adopt single Virtual Currency Act, creation of the body, which will be
authorized to issuing licenses, exemption the transactions with virtual currency from
taxation, spreading ideas concerning using of virtual currency in modern society.
Key words: virtual currency, bitcoin, e-money, mining, Digital Single Market Strategy.

*
The paper was submitted for publication as a result of attending study program at Faculty of
Economics and Business, University of Zagreb. The study program was implemented within
Tempus project 544117 InterEULawEast, scholarship mechanism (WP. 4).
**
Student at Law Faculty, Donetsk National University; nagornyak.irene@gmail.com.
***
Student at Faculty of Civil and Economic Law, National University “Odessa Law Academy”;
kristinaleonova777@gmail.com.
****
Student at Public Administration Faculty, National University “Odessa Law Academy”;
skorohod.92@inbox.ru.

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Intereulaweast, Vol. III (1) 2016

1. INTRODUCTION

The internet and digital technologies are transforming our world. However,
existing online barriers mean that citizens miss out on goods and services,
internet companies and start-ups have their horizons limited, and businesses
and governments cannot fully benefit from digital tools. It’s time to make the
EU’s single market fit for the digital age by tearing down regulatory walls and
moving from 28 national markets to a single one1.The economy and society of
Europe need to make the most out of digital2. Thus, The European Commis-
sion announced its long-awaited Digital Single Market strategy last spring in
an effort to strengthen Europe’s role in a global economy driven increasingly
by technology and innovation3. Europe needs new economic momentum to
help its economies to exit from the economic and financial crisis and to boost
long-term growth rates and competitiveness4. One of the factors, which can
lead to development of EU single market is digital currency, namely, bitcoins.
Changes in different fields of society ranging from economy, society, politics,
family and culture are so multi-directional that it becomes really complicated
to get a coherent picture from jungle of changes.
It should be looked for such a necessary futuristic new holistic currency sys-
tem, which could take care of not only on the routine transactional business
and market exchanges but also penetrate deeper into the bizarre realities of
postmodern life like unaccounted money leading to large scale corruption,
cyber economic crimes, funding of terrorist operations, social evils…
In the fast globalizing economy, the traditional national currency systems have
become, in fact, a kind of ‘regional currency system’ and the void at the inter-
national level is filled by, “the super national currency system”, which is a kind
of “stateless currency” like “Euro Dollars- Dollars outside the United States”.
A cryptocurrency is a medium of exchange like normal currencies such as
USD, but designed for the purpose of exchanging digital information
through a process made possible by certain principles of cryptography.
Cryptography is used to secure the transactions and to control the cre-
ation of new coins.

1
<https://ec.europa.eu/priorities/digital-single-market_en>, last accessed on 05/19/16.
2
<https://ec.europa.eu/digital-single-market/node/78517>, last accessed on 05/19/16.
3
<http://www.brookings.edu/blogs/up-front/posts/2015/09/22-european-union-digital-sin-
gle-market-sapiro>, last accessed on 05/19/16.
4
Tanel Kerikmae, Regulating eTechonologies in the European Union: Normative Realities
and Trends, Tallinn, 2014, p. 26.

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 I. Nahorniak, K. Leonova, V. Skorokhod: Cryptocurrency in the context of development of digital single market...

2. NOTION AND ORIGIN OF BITCONS

The man, who started Bitcoin in 2009 is a shadowy figure called Satoshi Na-
kamoto, who once said in a profile that he came from Japan. He once wrote
on a computer program: «Governments are good at cutting, off the heads off
centrally controlled networks like Napster, bur pure P2P networks are hold-
ing their own so that it’s very attractive to the libertarian viewpoint». Satoshi
Nakamoto defines an electronic coin as a chain of digital signatures. Each
owner transfers the coin to the next by digitally signing a hash of the previous
transaction and the public key of the next owner and adding these to the end of
the coin. A payee can verify the signatures to verify the chain of ownership5.
Since 2008, bitcoin adoption has been influenced by a diverse range of factors
that have made it one of the most volatile currencies in the world. Yet, de-
spite such volatility, more than 100,000 bitcoin transactions are taking and the
volume continues to grow due to the ‘permissionless innovation’ provided by
bitcoin’s underlying technology - the blockchain.
In May 2010, a programmer living in Florida named Laslo Hanyecz sends
10,000BTC to a volunteer in England, who spent about $25 to order Hanyecz
a pizza from Papa John’s. Today that pizza is valued at £1,961,034 and stands
as a major milestone in Bitcoin’s history6.
“The Bitcoin Primer” states that bitcoin is a peer-to-peer decentralized digital
currency that makes use of advanced elliptic curve mathematics and cryptog-
raphy, as well as a globally replicated public ledger called the blockchain (a
history of all transactions). In simpler terms, bitcoin is a digital currency that
the bearer has complete control over, that is, until it is given to another party.
When the other party receives bitcoin (the receiver), the transaction becomes
irreversible.
The price of a Bitcoin surged from less than a dollar to over $30 as a new de-
mographic became interested: speculators. Geeks who had casually collected
Bitcoin as a curiosity in 2009 found themselves sitting on tens, or even hun-
dreds, of thousands of dollars. Over the next several months, Bitcoin prices
were extremely volatile, dropping suddenly after each of a half dozen high pro-
file incidents. Exchanges were hacked, Bitcoins were lost from carelessness,
viruses popped up which stole any Bitcoin it could find, and some services
closed without warning, disappearing with their customers’ money 7.

5
Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, 2009, p. 2
6
<http://thenextweb.com/insider/2015/03/29/a-brief-history-of-bitcoin-and-where-its-go-
ing-next/>, last accessed on 05/19/16.
7
Chris Koss, Mike Koss, A Bitcoin Primer, CTO, CoinLab, (1) 2012, p. 1

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3. HOW DOES BITOCOIN OPERATE?

The operation of Bitcoin can be demonstrated on simple contract of sale. One

party would like to buy a good for 3 bitcoins from another party. As a new
user, you can get started with Bitcoin without understanding the technical de-
tails. Once you have installed a Bitcoin wallet on your computer or mobile
phone, it will generate your first Bitcoin address. The first party opens its bit-
coin wallet (input)8.
After that, the buyer scans/copies address of the seller in order to pay for the
good and fills in an amount of money (3 bitcoins). If you want to send bitcoins,
you need two things: a bitcoin address and a private key. A bitcoin address
is generated randomly, and is simply a sequence of letters and numbers. The
private key is another sequence of letters and numbers, but unlike your bitcoin
address, this is kept secret9.
Later, the party sends bitcoins from its bitcoin wallet out to the wider bit-
coin network, where the transaction is propagated and validated by the net-
work nodes. Mining is a system that is used to confirm waiting transactions
by including them in the block chain. It enforces a chronological order in the
block chain, protects the network, and allows different computers to agree
on the state of the system. To be confirmed, transactions must be packed in
a block that fits very strict cryptographic rules that will be verified by the net-
work. These rules prevent previous blocks from being modified because doing
so would invalidate all following blocks. This way, no individuals can control
what is included in the block chain or replace parts of the block chain to roll
back their own spends. Thus, miners include the transaction to the next block
to be mined.
Emission of bitcoins was named “Mining” as it resembles other forms of min-
ing (for instance, gold from the rock) - require production resources and takes
considerable time.
During the next step, the nodes verify the result and propagate the block. After
that, the seller sees the first confirmation. As a result, new confirmations ap-
pear with each new block that is created.

8
<http://www.economist.com/bitcoinexplained>, last accessed on 05/19/16.
9
Benjamin Guttmann, The Bitcoin Bible Gold Edition: All you need to know about bitcoins
and more, Norderstedt, 2013, p.22

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 I. Nahorniak, K. Leonova, V. Skorokhod: Cryptocurrency in the context of development of digital single market...

4. E-MONEY VS. BITCOIN

E-money is an electronic component of currency systems, and still trades in

familiar units such as dollars, euros, pesos, or yen. E-money is typically reg-
ulated and controlled within the framework of a government’s central bank-
ing system. The customers of such transactions are identified under Financial
Action Task Force standards and as a result are not anonymous10. Despite the
fact that both e-money and bitcoins are in digital format, there is plethora dif-
ferences between them.

Table 1 Differences between E-money and Bitcoin

Criterion E-money Bitcoin

Equal to amount of fiat currency Determined by supply and
Value
exchanged into electronic form demand, and trust in the system
Access to electronic devices such
Largely limited to Internet
Accessibility as mobile phones, and on agent
connection
network
Financial Action Task Force
standards apply for customer
identification (though such
Customer ID Anonymous
standards permit simplified
measures for lower risk financial
products)
Digitally used against receipt of
Mathematically generated
Production equal value of fiat currency of
(“Mined”) by peer network
central authority
Community of developers,
Issuer Legally established e-money issuer
called “miners”

Bitcoin is a decentralized electronic currency that derives its value from sup-
ply and demand as well as trust in the system. The network uses complex math
to verify transactions, and the people that volunteer their computing power to
the network, or “miners”, are generated bitcoins as a reward for their efforts.
In contrast to Bitcoin, e-money is not a separate currency and is overseen by
the same central authority as the underlying national currency11. In addition,
the value of Bitcoin is determined by supply and demand, and trust in the

10
<http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-defini-
tions-and-potential-aml-cft-risks.pdf>, last accessed on 05/19/16.
11
Sarah Rotman, Bitcoin Versus Electronic Money, CGAP, January 2014, p. 2

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Intereulaweast, Vol. III (1) 2016

system, meanwhile the value of e-money is equal to amount of fiat currency

exchanged into electronic form.
The most important difference between Bitcoin and e-money is that the last
is regulated and issued by legally established institution, fixed in legislation,
meanwhile bitcoin is issued by community of developers, called “miners” and
is not fixed at the level of Law in majority of states.

5. WORLDWIDE REGULATION OF VIRTUAL CURRENCY

First of all, we should start with high-developed legislation in Brazil. On Octo-

ber 9, 2013, Brazil enacted the Law No. 12,865, which provided the possibility
for the normalization of mobile payment systems and creation of electronic
currency, including the bitcoin12. Among other things, the Law fixes payment
arrangements and payment institutions that comprise the Brazilian Payment
System (Sistema de Pagamentos Brasileiro, SPB). The Law No. 12,865 defines
“payment arrangement” as a set of rules and procedures that regulate the ren-
dering of a particular service to the public that is accepted by more than one
recipient, through direct access by end users, payers, and recipients. “Payment
institution” is defined as a legal entity that, by adhering to one or more pay-
ment arrangements, has as a principal or secondary activity, alternatively or
cumulatively, one of the activities listed in article 6(III). “Electronic currency”
is defined as resources stored on a device or electronic system that allow the
end user to perform a payment transaction.
According to the legislation of China, we should mention that on December 3,
2013, the central Bank of China and four other central government ministries
and commissions jointly issued the Notice on Precautions Against the Risks of
Bitcoins. Defining it as a special “virtual commodity,” the Notice stated that
bitcoin is not a currency by its nature. Moreover, it should not be circulated
and used in the market as a currency. Banks and payment institutions in China
are prohibited from dealing in bitcoins. The Notice required that, at this stage,
financial and payment institutions may not use bitcoin pricing for products or
services, buy or sell bitcoins, or provide direct or indirect bitcoin-related ser-
vices to customers, including registering, trading, settling, clearing, or other
services; accepting bitcoins or using bitcoins as a clearing tool; and trading
bitcoins with Chinese yuan or foreign currencies13.

12
< http://www.bcb.gov.br/Pom/Spb/Ing/InstitucionalAspects/Law12865.pdf>, last accessed
on 05/20/16
13
<http://www.loc.gov/law/help/bitcoin-survey/>, last accessed on 05/20/16

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 I. Nahorniak, K. Leonova, V. Skorokhod: Cryptocurrency in the context of development of digital single market...

In addition, we should notice such a new developing system of virtual currency

legislation in Japan. A set of regulations was approved by Japan`s Cabinet on
4 March, 2016, recognizing virtual currencies as a legal form of payment with
the same functions as fiat money14. The main aim is to fight against money
laundering and protect customers of virtual currency exchanges. The new reg-
ulations place bitcoin exchanges under the authority of the Japanese Financial
Services Agency. It is obliged to register bitcoin exchanges with the Agency,
have a minimum capital of $88,000, submit annual financial reports and un-
dergo auditing by certified accountants.
We would like to emphasize that the most effective governmental actions were
accomplished in USA. In June 2015, New York Department of Financial Ser-
vices issued the world’s first specialized set of regulatory standards of cryp-
tocurrency called “BitLicense”. The document contains the conditions of the
activities of the companies with a “virtual currency” in the state of New York.
After approval of the bill, Bitfinex Kraken announced his decision to leave
New York due to the need for obtaining licenses. On September 22, 25 com-
panies have applied for a license in NYDFS. However, only one, namely, Cir-
cle Internet Financial, has managed to get it without further obstacles. Some
financial institutions have gone to bypass and obtained a license as a public
trust companies. For instance, it was made by itBit Trust Company and Gem-
ini Trust Company, LLC.15
Concerning California legislation, in January 2015, California became the first
US state, which officially authorized the use of Bitcoin, but with significant
limitations. On June 28, 2014, California passed Assembly Bill 129 to permit
the issuance and use of alternative currencies by repealing an existing law that
prohibited issuing or putting in circulation, as money, anything but the lawful
money of the United States. California’s BitLicense” has failed to pass in the
Legislature.16
On 19 February, 2016, bankruptcy Judge Dennis Montali, in the Northern Dis-
trict of California, found that the Bitcoin at issue should be classified as “intan-
gible personal property”, but not a currency.17

14
<http://www.coinfox.info/news/5020-japanese-government-approves-new-bitcoin-regula-
tions>, last accessed on 05/20/16
15
<http://fortune.com/tag/bitcoin-regulation/>, last accessed on 05/20/16
16
<http://www.digitalcurrencycouncil.com/legal/california-virtual-currency-legislation/>,
last accessed on 05/20/16
17
<http://www.coindesk.com/bankruptcy-judge-bitcoin-property-currency/>, last accessed
on 05/20/16

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The Bill 1326 defines “virtual currency” broadly to mean “any type of digital
unit that is used as a medium of exchange or a form of digitally stored value or
that is incorporated into payment system technology,” including digital units
of exchange that have a centralized repository or administrator, are decentral-
ized and have no centralized repository or administrator, or may be created or
obtained by computing or manufacturing effort.
On April, 25 2016 Bitstamp announced that Luxembourg has granted it pay-
ment institution license, making the company the first nationally licensed Bit-
coin exchange in the world. Under the European Union’s “passport” program,
which allows financial services providers legally established in one member
state to operate in others, Bitstamp, the third-largest Bitcoin exchange, will
also be licensed across all 28 European Union countries. The license goes into
effect July 1, when Bitstamp will be operational in Luxembourg. Bitstamp also
announced the launch of euro-Bitcoin trading. Consumers in all EU countries
wanting to exchange euros for Bitcoin and vice versa will be able to do so
through a fully licensed Bitcoin exchange.18
Summing up the results, we can see every day changing in legislation about
Bitcoin regulation, including impact of leading countries on legislation for de-
velopment of EU legislation.

6. REGULATION OF BITCOIN IN EU MEMBER STATES

The majority of EU Member States, namely, Belgium, Cyprus, Denmark,

Netherlands, Portugal and Spain have no regulation concerning cryptocurren-
cy, warnings have been made with regards to their potential threats. Neverthe-
less, some Member States, such as Germany, France and others have under-
taken steps in order to regulate cryptocurrency. The author has carried out an
analysis on Bitcoin’s legal status in those states, where bitcoins are popular and
fixed in some governmental or official opinion on bitcoin.

18
<http://www.forbes.com/sites/laurashin/2016/04/25/7886/#37923897518d>, last accessed
on 05/20/16

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Table 2 The regulatory basis for Bitcoin in some EU Member States192021222324

EU Mem-
Regulation Official opinion
ber State
On December 6, 2013, the Croatian National Bank
CNB stated that it is not electronic money since it’s
reportedly conducted a discussion on the circulation of
Croatia not debt to the issuer and that it is not legal tender
digital currencies and concluded that the Bitcoin is not
in Croatia but can be legally used.
illegal in Croatia.19
In March 2014, Estonian Tax Authority defined the
official government position that Bitcoin is an alternative Bitcoin is widely spread in Estonia. However, there
Estonia
means of payment and income derived from Bitcoin is no government regulation concerning this issue.
transactions constitutes capital gain subject to taxation.20
Ruling 034/2014 by the Finnish Central Board of Taxes
(CBT) stated that commission fees charged on bitcoin The Bank of Finland concluded that bitcoin simply
Finland purchases by an exchange market were, under the EU doesn’t meet the legal conditions required to be
VAT Directive, banking services and therefore VAT considered a form of electronic payment, either.
exempt.21
In June 2014 France’s central bank released a report on
Bitcoin cannot be considered a real currency or
France the Bitcoin, warning about the dangers of such “virtual
22 means of payment under current French laws.
currencies.”
BaFin (the German ministry of finance) announced
The communication on bitcoin issued by Federal Finan-
it does not consider bitcoin to be e-money or a
cial Supervisory Authority on 19 December 2013 defines
functional currency. Instead, it referred to it as
bitcoins are legally binding financial instruments that
Germany “private money” and a “financial instrument”.23
fall into the category of units of account, in accordance
This does require an authorization under the
with the first sentence of section 1(11) of the German
German Banking Act if the purchasing or selling of
Banking Act.
Bitcoins is provided on a commercial scale.
On December 23, 2013, the Ministry of Finance of the
Republic of Slovenia issued a formal opinion about The opinion states that the bitcoin is not a mone-
Slovenia the status of the bitcoin and other virtual currencies in tary means under Slovenian law and not a financial
response to a request from the Tax Administration of the instrument.
Republic of Slovenia.24

19
<http://www.reddit.com/r/Bitcoin/comments/1sjgby/croatian_central_bank_establishes_
that_bitcoin_is/., last accessed on 05/20/16
20
<http://www.dv.ee/article/2013/12/19/chtobank-jestonii-dumaet-o-bitkoine, last accessed
on 05/20/16
21
<http://www.vero.fi /sv-FI/Detaljerade_skatteanvisningar/Inkomstbeskattning_av_per-
sonkunder/Inkomstbeskattning_av_virtuella_valutor%2828454%29., last accessed on 05/20/16
22
<http://www.banque-france.fr/fileadmin/user_upload/banque_de_france/publications/Fo-
cus-10-stabilitefinanciere.pdf., last accessed on 05/20/16
23
< http://www.gesetze-im-internet.de/kredwg/index.html, last accessed on 05/20/16
24
<http://www.durs.gov.si/si/davki_predpisi_in_pojasnila/dohodnina_pojasnila/dohodek_
iz_kapitala/dobicek_iz_kapitala/vrednostni_papirji_in_delezi_v_gospodarskih_druzbah_za-
drugah_in_drugih_oblikah_organiziranja_ter_investicijski_kuponi/davcna_obravnava_
poslovanja_z_virtualno_valuto_p o_zdoh_2_in_zddpo_2/, last accessed on 05/20/16

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Consequently, Member States’ legislative approaches on regulation virtual

currencies are much diversified and have numerous imperfections and gaps.
Thus, we can assume that the regulation of Bitcoin requires the implementa-
tion of conceptually new legislation.
According to our survey, the Dutch model can be implemented in other EU
Member States: entities, which are involved in commercial trade of cryptocur-
rency, require a license as they are considered to deal with financial instru-
ments.

7. ANALYSIS OF LEGAL FOUNDATION FOR BITCOIN

This section includes analysis of legal foundation for Bitcoin’s functionality is

carried out from the perspective of relevant EU supranational legislation and
underlying conceptual framework. The main aim of abovementioned analysis
is to demonstrate the applicability of relevant legislation to Bitcoin.
Bitcoin’s legal framework is extremely unclear. Such course of events led to
the fact that none of the regulatory bodies in the EU have achieved sufficient
clarity in the context of legal treatment of Bitcoin and its stakeholders. There-
fore, there is an urgent need for a precise strategy of Bitcoin’s regulation in
order to establish the maximal possible balance between the interests of Bit-
coin stakeholders, who strain after the Bitcoin’s benefit and decreasing of the
relevant risks, and the interests of regulators.
Despite the fact that the concept of Bitcoin lacks clear legal framework, the
EU regulatory bodies tend to agree that Bitcoin is legal. Nowadays, there is no
specific legislation related to the status of Bitcoin in the EU that would protect
consumers from financial losses in case of failure of exchanges virtual cur-
rencies. However, there are a few legal acts devoted to Virtual Currency issue.
First of them is the European Banking Authority (EBA) ‘Consumer Trends
Report 2014’25. The EBA publishes an annual Consumer Trends Report to col-
lect, analyse and report on consumer trends. In particular, trends and issues
identified for 2014 include virtual currencies. This report contains an analysis
of level and reasons of Bitcoin’s spreading. In addition, it includes provisions
concerning the risks related to virtual currencies. It is aimed at establishing a
taskforce in order to decide whether virtual currencies ought to be regulated.

25
< h t t p s: // w w w.g o o g l e . c o m / u r l?s a = t & r c t = j & q = & e s r c = s & s o u r c e = we b & c -
d =1& c a d = r j a & u a c t = 8 & ve d = 0 a hU K Ew i A8 8 G W1e 3M A hU D D iwK H b Q p -
Bj s Q F g g d M A A & u r l = h t t p %3A%2 F %2 F w w w. e b a . e u r o p a . e u %2 F d o c u -
ments%2F10180%2F534414%2FEBA%2BConsumer%2BTrends%2BReport%2B2014.
pdf&usg=AFQjCNE3ZdQAXAhv-g7ZkZwKqwbrHF3Dtg, , last accessed on 05/20/16

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 I. Nahorniak, K. Leonova, V. Skorokhod: Cryptocurrency in the context of development of digital single market...

The second one is European Banking Authority (EBA) Opinion on ‘Virtual

Currencies 2014’26. On the 4th July 2014, EBA issued an Opinion on “virtual
currencies”, following an analysis of the risks that could present as long as
there are not regulated:
− Gives a definition of ‘virtual currencies’;
− Defines potential benefits of using VC;
− Determines different kind of risks (to users, financial integrity, etc.);
− Propose key risks drivers, regulatory approach for long and short term.
The EBA Opinion is an appropriate tool, which can build EU legislation con-
cerning cryptocurrency in future.
The third one is European Central Bank (ECB) Report on ‘Virtual Currencies
Schemes – a Further Analysis 2015’27. This report recognizes growth of vir-
tual currencies recently and analyses some of their dynamics and challenges:
− Describes the notion “virtual currency schemes”;
− Includes new categories of the most relevant actors of VCS such as inven-
tors, issuers, miners, processing service providers, users, wallet providers,
exchanges, trading platforms, and others;
− Fixes the diversity of VCS;
− Clarifies VCS’s impact on the tasks of the Eurosystem. A significant part
of the analysis addresses how risks associated with VCS can affect central
bankers’ tasks, such as monetary policy, price stability, financial stability,
supervision and the operation of payment systems.
In 2012, the European Central Bank defined virtual currencies, including Bit-
coin, as ‘a type of unregulated, digital money’, which ‘act[s] as a medium of
exchange and as a unit of account within a particular virtual community’, but
does not clearly ‘fulfil the ‘store of value’ function in terms of being reliable

26
<https://www.google.com /url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&-
c a d = r j a & u a c t= 8 & ve d = 0 a hU K Ew i G7d S 71e 3M A h X KO RQ K H R sg C 9AQ Fg gc -
MAA&url=https%3A%2F%2Fwww.eba.europa.eu%2Fdocuments%2F10180%2F657547%2FE-
BA- O p -2 014 - 0 8%2 BO p i n io n%2 B o n%2 BVi r t u a l%2 BC u r r e n c i e s .
pdf&usg=AFQjCNHkk1caDiVORBQXlCknjBGc_keYgA&bvm=bv.122448493,d.bGg, last
accessed on 05/20/16
27
< ht t p s://w w w.go og le.c o m / u rl?s a = t & r c t= j& q = & e s r c = s &-
s o u r c e = we b & c d =1& c a d = r j a & u a c t = 8 & ve d = 0 a hU K Ew i _v 9 D h1e 3M A h -
W I P RQ K H Wx F D 3 k Q F g g c M A A & u r l = h t t p s %3A%2 F %2 F w w w. e c b . e u r o p a .
eu%2Fpub%2Fpdf%2Fother%2Fvirtualcurrencyschemesen.pdf&usg=AFQjCNHYIvtPVD-
vu_aI1JTDN6RSSOXrmYg&bvm=bv.122448493,d.bGg, last accessed on 05/20/16

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and safe’. The European Central Bank in its comprehensive research on vir-
tual currencies has defined Bitcoin as ‘unregulated digital money, which falls
within central banks responsibility as a result of characteristics shared with
payment systems that give rise to the need for at least an examination of devel-
opments and the provision of an initial assessment’.28
Earlier the European Banking Authority has designated virtual currency, in-
cluding Bitcoin, as a form of unregulated digital money that is not issued or
guaranteed by a central bank and that can act as means of payment’29. The
EBA pointed out that since the bitcoin is not regulated, consumers are not
protected and are at risk of losing their money and that consumers may still be
liable for taxes when using virtual currencies.30
Moreover, there are certain unclear issues stemming from the consumer’s pay-
ment in bitcoins. For instance, it is unclear, how to apply taxation rules to such
Bitcoin transactions. Though certain national regulatory authorities within the
EU have argued that Bitcoin transactions are subject to taxation under the rel-
evant tax law, none of these regulatory bodies have clarified the way of such
taxation, which should be implemented.31
The Court of Justice of the European Union has ruled that the services of a Bit-
coin exchange in exchanging Bitcoin for a traditional currency is exempt from
VAT on the basis of the ‘currency’ exemption (Skatteverket v David Hedqvist
Case C-264/14).32
The Court was asked to consider how an exchange, which sold Bitcoin for
traditional currencies, would be taxed.
Mr. Hedqvist wishes to provide, through a company, services consisting of
the exchange of traditional currency for the ‘bitcoin’ virtual currency and vice
versa.
Before carrying out such transactions, Mr. Hedqvist requested for a prelimi-
nary decision from the Revenue Law Commission in order to establish whether
VAT must be paid on the purchase and sale of ‘bitcoin’ virtual currency units.

28
www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf, last accessed on
05/20/16
29
<www.eba.europa.eu/documents/10180/598344/EBA+Warning+on+Virtual+Currencies.
pdf, last accessed on 05/20/16
30
http://www.eba.europa.eu/-/eba-warns-consumers-on-virtual-currencies, last accessed on
05/20/16
31
<www.frank-schaeffler.de/wpcontent/uploads/2013/08/2013_06_20-Antwort-Bit-
coin-Koschyk.pdf, last accessed on 05/20/16
32
< http://curia.europa.eu/juris/documents.jsf?num=C-264/14, last accessed on 05/20/16

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The Skatteverket appealed against the Revenue Law Commission’s decision

to the Högsta förvaltningsdomstolen (Supreme Administrative Court) arguing
that the service to which Mr. Hedqvist’s request refers is not covered by the
exemption.
Having doubts as to whether one of those exemptions applies to such transactions,
the Högsta förvaltningsdomstolen (Supreme Administrative Court) decided to stay
the proceedings and refer to the Court of Justice for a preliminary ruling.
Court decision confirms that an exchange of Bitcoin for a traditional currency
is a supply of services. The Court enacted that an exchange of Bitcoin fell
within the exemption in Article 135(1)(e) of the VAT Directive33. This exempts
transactions ‘concerning currency, bank notes and coins used as legal tender’
from VAT.
The decision that supplies Bitcoin should be exempt from VAT provides an
important degree of certainty and should help virtual currency exchanges to
set up in Europe.

8. BENEFITS AND RISKS OF USING BITCOIN

Analyzing abovementioned legal basis for virtual currency we can define such
main strengths, weaknesses, opportunities and threats of bitcoin.

STRENGTH: WEAKNESESS:
• Lower transaction cost: the are no bank • Bitcoin exchanges vulnerable to hack-
or other fees; ing;
• Speed Transaction proceeding time: • Pure consumer experience;
for Bitcoin the total process time is • Uncertainty about regulation;
between 10-60 minutes. Also it works • Bitcoins are not widely accepted;
at 24/ 7 basis unlike payments make • No buyer protection;
through traditional payment systems; • No Valuation Guarantee;
• Certainty of payment received; • Uncertain Future.
• The absence of intermediaries;
- Financial inclusion outside the EU;
• Security of personal data: customers
using Bitcoin leave no data behind
which can be stolen
• Limited interference by public authori-
ties.

33
<http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=URISERV%3Al31057, last accessed
on 05/20/16

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OPPORTUNITIES:
• Bitcoin accounting transparency elim-
inates the need for businesses to pro-
duce documents about activities;
• Contributing to economic growth;
• Elimination of obstacles in the context
of creating Digital Single Market in
EU;
• Investment in Bitcoin.
• It will be more consumer and business
friendly.
THREATS:
• Criminals are able to launder proceeds
of crime because they can deposit/
transfer VC anonymously;
• Criminals are able to launder proceeds
of crime because they can deposit/
transfer VC globally, rapidly and irre-
vocably (it might be used for money
laundering)
• Criminals might use VC exchanges to
trade illegal goods;
• Criminals/terrorists use the VC remit-
tance systems and accounts for financ-
ing purposes. ( it can be used for fi-
nancing criminals or terrorist activities)

9. CONCLUSION

Analyzing the issue related to the regulation of Bitcoin, the author has carried
out the technical analysis of the functionality of Bitcoin and the legal analysis
of Bitcoin and the Bitcoin stakeholders. The technical analysis has shown that
Bitcoin is a novel decentralized payment mechanism functioning under the
Bitcoin protocol, which is practically impossible to amend in a way that con-
tradicts the interests of the majority of Bitcoin stakeholders. The legal analysis
has demonstrated that Bitcoin shares common properties with a number of
existing conceptual and statutory categories. However, regardless of this fact,
it is impossible to bring Bitcoin under the scope of current legislation, since
the current legal framework is based on the centralized approach to money,
payments, and financial services, and does not imply the existence of decen-
tralized payment mechanisms.
Thus, it is necessary to adopt single Virtual Currency Act, which includes defi-
nition of “virtual currency” means any type of digital unit that is used as a me-
dium of exchange or a form of digitally stored value. This Act should include
provisions, which would regulate rules of taxation the Bitcoin transactions.
The clear advantage of action being taken at European Union level in respect
of VCs is the possibility to implement a consistent level of regulation, which
ensures that the risks identified are mitigated for all market participants in the
European Union. Without a Union response, national regimes are likely to
take differing forms. The nature of VCs is that they can be provided from one
Member State but used across the European Union (and beyond) with little or
no local infrastructure needed. Differing levels or forms of regulation in one

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Member State could therefore lead to the VC industry shopping for the most
convenient approach to the regulation, with European Union consumers re-
ceiving accordingly different levels of protection. Only regulation at European
Union level can ensure removal or minimization of any barriers, cross-border
provision of services or cross-border establishments.
It is important to consider a license to be obligatory and to create the Body,
which will be authorized to issuing such licenses. It should be fixed that no
Person shall obtain the superintendent engagement in Virtual Currency Busi-
ness Activity without a license. The first company, which has got a license
and became the first-fully-licensed bitcoin exchange in Europe is Bitstamp.
The license will come into effect on July 1, 2016. The license has been signed
by Luxembourg’s Minister of Finance. This is the first time that a bitcoin ex-
change has been regulated by a state. In this case it has been passported to the
entire continent of the EU. No other exchange has been able to get a national
registration. Thus, this is a great achievement. We can predict that other ex-
changes will make the same steps in order to get licenses and to bring stability
to the industry.
One of the key ideas of our research is to spread ideas concerning using of
virtual currencies, namely Bitcoin in modern society. Bitcoin is the best tool,
which can bring cryptocurrency to the masses. The reality is, the general pub-
lic is still largely wary, or ignorant, of crypto. Why? The reason is that many
people don’t understand the mechanism of operation of Bitcoin. They are not
ready to renounce usual, physical currency in classical meaning. There should
be carried out a lot of work devoted to explanation of the benefits of Bitcoins.
We hope that enlightenment among people will overcome the fear of using
Bitcoin.

LITERATURE:

BOOKS AND ARTICLES

1. Benjamin Guttmann, The Bitcoin Bible Gold Edition: All you need to know about
bitcoins and more, Norderstedt, 2013, p.22.
2. Chris Koss, Mike Koss, A Bitcoin Primer, CTO, CoinLab, (1) 2012, p. 1.
3. Sarah Rotman, Bitcoin Versus Electronic Money, CGAP, January 2014, p. 2.
4. Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, 2009, p. 2.
5. Tanel Kerikmae, Regulating eTechonologies in the European Union: Normative
Realities and Trends, Tallinn, 2014, p. 26.

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EU LEGISLATION

1. Council Directive 2006/112/EC — the EU’s common system of value added tax
(VAT), Art. 135

CASE LAW

1. Case C-264/14 Skatteverket v David Hedqvist (2015/C 414/08)

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